Analysts have shot down Beijing’s threat that China will replace its massive Australian iron ore imports with Brazilian ore, as China opens up another front in the fledgling Australia-China trade war.
State-controlled media The Global Times warned China could abandon Australian iron ore as it prepares to slap restrictions on Australian beef and barley after Beijing accused Australia of flouting world trade rules.
The accusation from Australia’s largest trading partner follows Prime Minister Scott Morrison’s calls for an international inquiry into the handling of COVID-19.
But one major obstacle undermines China’s threat to replace Australian iron ore with Brazilian: there simply isn’t enough of the core commodity used to make steel to meet China’s demand.
“The market is very tight, everyone is running as hard as they can … you couldn’t find a spare tonne elsewhere in the market,” UBS analyst Glyn Lawcock said.
With the market tight, it is difficult for China to source iron ore from alternative sources.”
Australia’s domination of the iron ore market has been fairly consistent for the past five years, said Mr Lawcock. Its global prime position has been cemented over the past 12 months as major rival Brazil cut supply after being hit with safety problems, weather issues and, now, COVID-19.
While Fortescue Metals chief executive Elizabeth Gaines shied away from commenting on the trade skirmish, she said the major iron ore producer has seen China’s demand for Australian ore increase and expects that to continue.
“The Chinese steel industry produced 234.5 million tonnes of crude steel in the March quarter, an increase of 1.2 per cent compared to the prior corresponding quarter, supporting strong ongoing demand for iron ore.
“We see strong ongoing demand for iron ore and anticipate a steady recovery in economic activity in China which will continue to contribute significantly to WA’s and Australia’s prosperity,” Ms Gaines said.
China imported a staggering 62 per cent of its iron ore from Australia, more than double the 21 per cent imported from Brazil in 2019, according to UBS data. Port Hedland data shows China’s demand for Australian iron ore dwarfs all other countries.
While foreign affairs analyst from the Australian National University Darren Lim thinks “anything is possible” he doesn’t expect Beijing to follow through on its threat as the Chinese leadership weighs the economic costs of delaying or slowing down iron ore shipments against the political benefits of escalating these tensions further.
“My research suggests so far that there has been a reluctance by Beijing to implement informal sanctions that would cause major impacts on the production side of the Chinese economy, and I think that’s because they view the political costs of such disruption (in terms of job losses and ripple effects) to be too great,” Mr Lim said.
New Zealand is the latest country to cop criticism from Beijing following its support for Taiwan’s participation at the World Health Organisation. In the past month, China’s state media has also threatened a consumer boycott against the Netherlands over its decision to change the name of its de facto embassy in Taiwan.
China is Australia’s largest two-way trading partner in terms of goods and services, accounting for 26 per cent of the nation’s trade, according to figures released by the Department of Foreign Affairs.
Prior to the coronavirus crisis, two-way trade reached a record $235 billion in 2018–19, which is up over 20 per cent from the previous year.